Archive - Nov 2009

In what may end up being one of the best things for CNBC, if not for many of its anchors, the WSJ reports that the Comcast-GE deal for NBC Universal is practically complete. Next stop for the Englewood Cliffs brigade: 15th and Market. Fear not: the Walt Whitman rush our traffic is much more manageable than that of the George Washington. Also, Smokes has a 3 for 1 special for 40 year old anchorettes who will do anything to adjust the weighted average age of their bodies by 5 to 10 years lower.

Recently the dollar has become the carry currency of choice for virtually anyone who breathes, let alone manages even one dollar in assets, courtesy of unprecedented Wall Street-Fed complicity. And while there is no longer any speculation about the carry trade's prevalence, it is interesting to observe how the topic of DXY-SPX -1:1 correlation has developed over the past two years. While digging through the annals of the Internet, we came across this essay by Brad Setser, in which the current Administration think-tanker is proven not exactly correct: "In my view, it will be hard for the dollar to emerge as major funding currency." Right.

Zero Hedge's Inkmaster in Residence John Redmann with tomorrow's cartoon, today.

From Goldman Sachs, primary unfolding Q3 themes:

• Theme 1: Consumer Outlook remains weak; “End demand” in question. In a marked change from last earnings season, when companies discussed a “stabilizing” economy, this quarter’s conference calls focused on the continued challenging environment for the US consumer, a slow economic recovery in 2010, and the lack of underlying “end demand”.
• Theme 2: Pricing Power remains weak due to low Capacity Utilization. Most management teams cited weak pricing power in the current environment. A few even expressed deflationary concerns. Firms tied to commodities-related businesses tended to have a slightly more favorable
  outlook on pricing power. Several calls referenced low capacity utilization rates and the probable lack of pricing power until utilization rates rise.
• Theme 3: Cost Cutting: Still at rapid pace, expect more in 4Q and 2010. Management teams pointed proudly to their ability to cut costs faster than expected in recent quarters and alluded to further expense reductions ahead. Only a few firms mentioned a willingness to re-hire staff into their company. Rather, companies tended to emphasize the permanence of expense reductions.
• Theme 4: Use of Cash: Appetite for capital spending slowly growing. In contrast with earnings seasons during the past year when companies emphasized the importance of cash positions on the balance sheet, management’s 3Q comments expressed a growing tolerance for capital
  spending. Although not all companies had ramped up spending plans, most teams mentioned some sort of revitalization in spending via dividends, share repurchases and/or capital expenditures.

The changes within the indicators are noteworthy, but there is still nothing noteworthy regarding the indicators.

• "I'm doing God's work." Meet Mr. Goldman Sachs (TimesOnline) [Goldman getting trading tips from the big guy himself explains their Q3 P&L]
• Obama's failure in his core mission: curbing unemployment, which is now 50% higher than a year ago (NYT) Expect several dozen TV appearances on Monday to explain what really happened
• House passes $1 trillion U.S. healthcare overhaul legislation (Bloomberg)
• Why can't the Fed just buy Yuan? (Worthwhile Canadian Initiative)
• What rebalancing of Chinese and American consumption (China Financial Markets)
• Gordon Brown joins call for Tobin Tax, denied by Turbo Tim, Canada and IMF (FT, Telegraph)

“The real question investors need to ask themselves is this: if we truly are in the middle of a Fed-induced liquidity rally where the fundamentals simply don’t matter, do you buy now or wait it out for the inevitable bust?”

The earlier discussion of CDS, Einhorn, and the US UST-CDS basis trade, sparked a flurry of queries on the topic of "really big numbers." Therefore, even as ZH staff awaits the most recent data out of the BIS, we present for your numeric (in)comprehension pleasure lots and lots of zeroes. The chart below summarizes the biggest relevant numbers currently out there, appearing as pixels occasionally on every single computer in the financial world. And what does it say? That the total notional value of all OTC derivative contracts as of the most recent count (sucks to be on the recount committee), was $592,000,000,000,000.00 at the end of 2008. Fear not: this number is actually a reduction from the most recent previous read of $683,700,000,000,000.00 in June of 2008. Well wait, that thing we said about fear not, ignore that: because the net notional, or the market value of all OTC contracts, i.e. what someone (cough taxpayer cough) would be on the hook for when the Fed's plans go astray, increased by 66.5% over the same period, to $33,900,000,000,000.00. Like we said, big numbers - and this is just OTC. The real number includes regulated exchanges, and to estimate that, double the numbers above. In totality, the "sidebets" on everything from interest rates, to F/X to corporate default risk, amount to about $1.3-$1.4 quadrillion (that's 15 zeroes before the decimal comma) in terms of uncollateralized liquidity (think inflation buffer): take all those zeroes away and the value of the dollar would go down by 1E10-15: you listening yet American middle class? And the actual exposure, or "money at risk" is roughly $60 trillion: a number which is about the same as the world GDP if one were to remove all the various stimulus programs. Take away Goldman, JP Morgan, and all the other wannabe BSD's, and this is what you end up with: the heart and soul of the Too Big To Fail monster itself. And there is no way on earth to stop that mangled, mutated heartbeat without destroying the very fabric of both our capital markets and societal system. Please give the FederalReserve a golf clap for this truly amazing accomplishment.

"Simon Johnson, an MIT professor and former chief economist at the International Monetary Fund, reckons there should be caps of roughly $100 billion on the assets of financial institutions and "serious criminal consequences" if firms are caught trying to get around such limits."

A recent note out of permabullish ward of the state BofAMLCFC (makes sense why they would be permabulls: after all nobody asks why CNBC is a non-stop propaganda mouthpiece for pro-market, pro-GE, pro-stimulus policies... everyone makes fun of it, everyone cracks up at Kudlow and company, but nobody questions it - it does, after all, make complete sense when one considers their agenda is to have all their ever diminishing viewers purchase however many shares of their soon to be former employer GE, even if it means said viewers financial ruin in a month or a year) shares some interesting perspectives on what would happen if a market that is priced for absolute perfection does not end up occurring (or, scarier, does). The note below out of Sadiq Currimbhoy, Merrill's Hong Kong strategist should be kept in mind any time readers enjoy the rosy propaganda from Merrill's David Bianco, which has the form, consistency and texture of two-ply Charmin'.

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With over 30 people arrested or cooperating with the US Attorney General in the biggest insider trading bust in history, one can be sure that as many of those wishing to avoid jail time sing, many more arrests will undoubtedly come. Will this investigation impact "information arbitrage" specialist SAC (as Zero Hedge has speculated)? As of now the firm has gone through unscathed, although the net may be closing in on the 72 Cummings Point Road behemoth. After all, why would the SEC attempt to place its informant back with Steve Cohen's $12 billion hedge fund unless they had prior reason to be suspicious, and unless Richard Lee had advised them of improprieties handled by the man who trades 10% of the NYSE's (declining) volume daily. An arrest implicating billionaire Steve Cohen would likely make (or destroy) the political career of whoever the attorney prosecuting him. Which is why any evidence better be ironclad.

I've been meaning to write a piece on Ludwig von Mises, the greatest economist who ever lived, and, if you will, a hero of mine. This is a piece on Mises from the Op-Ed page of the Wall Street Journal by Mark Spitznagel. Spitznagel is the head of Universa Investments and is a protege and partner of Nassim Taleb of Black Swan fame. Those of you who have been following my blog know of my admiration of Mr. Taleb. He and Mr. Spitznagel were also "right," and Universa made a lot of money for their investors from our economic crisis.

Who would have thought that central bankers who have been offloading gold the last 10 years would suddenly reverse course and become buyers? Hey, can't blame these guys. They are into self preservation just like any other Fidelity, Putnam, or Vanguard "Money Mangler" on Wall Street attempting to save his career and avoid becoming an unemployment statistic or worse, pushed off the social register.

David Einhorn is angry at CDS. But is that the full story? Hardly. We believe Einhorn's attack on CDS is an implicit attack on the broken core of the fiat monetary system itself.